Real Exchange Rate Misalignment and Economic Performance in Sub-Saharan Africa: A Dynamic Panel Data Approach

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Addis Ababa University


The objective of this study is to investigate the impact of real exchange rate misalignment on the long-run growth of 29 sub-Saharan African countries using a panel data from 1980 to 2007. We first estimate the effects of macroeconomic fundamentals on the real exchange rate of SSA using the more efficient Dynamic panel OLS cointegration estimation technique of Kao and Chiang (2000), from which misalignment indicators are derived. We have found terms of trade and capital flow have positive significant impact on ERER. We have also estimated four different kinds of economic growth regression models using the two step system GMM estimator which is proved to be helpful in resolving econometric problems of endogeneity, heteroskedasticity, autocorrelation and omitted variable biases. The results for the two-step System GMM panel growth models signify that real exchange rate misalignment, its variability and higher undervaluation have strong negative effect on the economic growth of SSA. In contrast, smaller undervaluation is found to have a significant positive effect on economic growth. Consequently, SSA governments’ policies should be directed on achieving a moderately depreciated exchange rate.



Economic Policy Analysis